BENGALURU (Reuters) - German home prices will see a far shallower decline this year than in 2023 as borrowing costs are expected to fall, according to analysts polled by Reuters who said the supply of affordable homes would remain short of demand.

Hit by the worst real estate crisis in decades, average home prices in Germany have dropped nearly 13% from their peaks in the second quarter of 2022 and declined over 8% last year, the biggest annual fall since official data were first published in 2000.

Fading interest from foreign buyers has added to troubles in the beleaguered property market. In other major housing markets, including the United States, activity and prices have stayed robust despite high interest rates and elevated living costs.

Average German home prices were expected to decline 2.0% this year, according to the median view from the May 9-21 Reuters poll of 13 property experts, a downgrade from the 1.7% fall predicted in the February survey.

House prices were then expected to rise 2.0% and 3.0% in 2025 and 2026, respectively.

That expected recovery was partly driven by predictions the European Central Bank would cut interest rates next month, earlier than the U.S. Federal Reserve, and then twice more this year.

"The German real estate market bottomed out at the end of 2023. With the decline in bond yields and mortgage interest rates at the end of 2023, demand picked up again at the beginning of 2024," said Carsten Brzeski, global head of macro at ING.

"As affordability remains at low levels and prices in the construction sector remain elevated, we do not expect a strong rebound in demand for new housing."

Highlighting concerns over weak demand, the Ifo economic institute recently said a majority of companies in the residential construction sector reported a lack of orders in April despite the industry's business climate improving.

Meanwhile, the supply of homes, especially affordable ones, has remained weak. Building permits for apartments fell nearly 25% in March from a year earlier.

That situation is unlikely to improve anytime soon. Eight of 13 analysts who answered an additional question said supply of affordable homes would fall far short of demand over the coming two to three years. The rest said it would fall short.

"Due to the significant amount of project cancellations overall housing completions will fall to 225,000 units in 2024 and only 195,000 units in 2025," said Sebastian Schnejdar, senior real estate analyst at BayernLB.

"Therefore, the general housing supply will decrease. This is even more true for the supply of affordable homes, which will decrease even further over the coming 2-3 years."

An over 60% majority, eight of 13, respondents said the government, which has been struggling to meet the goal of building 400,000 apartments a year, should be more involved in improving affordability. The remaining five said it should not.

"Without any government incentives and programmes, the lack of affordable housing will rather worsen over the coming years .... A reduction in bureaucracy and targeted investment could support the construction sector and thus increase residential real estate construction activity," added ING's Brzeski.

"Given incidental purchase costs are quite high ... direct subsidies could help to improve affordability."

(For other stories from the Reuters quarterly housing market polls:)

(Reporting by Indradip Ghosh; Polling by Pranoy Krishna and Rahul Trivedi; Editing by Jonathan Cable and Mark Potter)

By Indradip Ghosh